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A SIMPLE EXPLANATION 

OP 

MODERN BANKING CUSTOMS 

BY 
HUMPHREY ROBINSON 

EDITED FROM A LEGAL STANDPOINT 

BY 

W. OVERTON HARRIS 

EX-JUDGE OF THE JEFFERSON COUNTY (KY.), CIRCUIT COURT 
DEAN OF THE LOUISVILLE (KY.), LAW SCHOOL. 



Designed for the promotion of closer and more satisfactory relations 
between the public and the banks ; and for the information of depositors 
generally, and of those just entering the banking business. 



Copyright 1909 
By HUMPHREY ROBINSON. 



^ 






PUBLISHED BY 

HUMPHREY ROBINSON, 

AMERICAN NATIONAL BANK BUILDING. 

LOUISVILLE, KENTUCKY 

All Rights Reserved 



APR 24 iy09 



COKTEISTTS. 

PAGE 

General Remarks 9 

The Choice of a Bank 10 

Opening a Bank Account n 

How to Deposit 13 

Your Account on the Bank's Books 14 

Stopping Payment of a Check 16 

How the Bank collects the Checks you deposit 16 

The Clearing House . ., 17 

A Certified Check 23 

Protesting Notes, Drafts, etc., why necessary and how it 

is executed . 24 

The Local Collection Department 27 

The Loan Department 33 

The Analysis of a Bank's Published Statement 41 

New York Exchange ... 48 

The Method iof Issuing National Bank Notes 48 

The so-called ' ' Special Privileges ' ' of Banks 51 

The Guarantee of Bank Deposits 52 



A Simple Explanation of 
Modern Banking Customs 



General Remarks 

After some years of work in a bank, it has been impressed 
daily upon the writer that, if the depositors were fully informed 
about the details of the conduct of banks, closer and more satis- 
factory relations would result. Hence this attempt to explain, 
in a simple and concise way, avoiding as much as possible the 
use of technical terms, certain things that every depositor should 
know. 

For ten years the writer was "in business." For an equal 
length of time he has been connected with a large city bank. 
He remembers his utter lack of comprehension of banks and 
their ways, and his consequent mistakes, perplexity, and embar- 
rassment in dealing with them. Also the unfairness and preju- 
dice with which he often judged them. 

Recalling all this, he believes that, without giving offense, he 
can state these facts. 

Many men having constant transactions with the banks do 
not realize the importance of the choice of a bank; few under- 
stand the correct way in which a note should be drawn, or how 
to determine the exact due date of a sixty or ninety-day note, 
or acceptance ; what "protesting" a note or draft really means, 
and what effect it has on the drawers or endorsers ; how to judge, 
from a bank's published statement, whether it is in a strong or 
weak condition; the functions of the Clearing House and the 
simplicity of its methods ; why the banks are compelled to pursue 
a certain course in the collection of paper sent them, even though 
this course may be very objectionable to the payers; how checks 
are collected; the effect of certifying a check; and many other 
details. Also that very few depositors have ever seen a copy 
of the National Bank Act, or are familiar with the laws govern- 
ing their own State Banks and Trust Companies. 

This lack of knowledge of the laws and customs, from which 
there can be no safe departure, is undoubtedly the cause of many 
unreasonable requests; assertions of fancied rights; remon- 



IO 

strances, and irritating misunderstandings. This condition 
should not exist. One explanation for it may be, that the work 
in a bank is so strenuous, everything having to be accomplished 
in so short a time, that the officers and employes do not have 
the opportunity to explain fully the reason why. 

Many seem to think that the details of banking are very com- 
plicated. But there is no mystery about these details. They are 
very simple and sane. The methods of bookkeeping are really 
elementary, principally mere addition and subtraction. Of course 
the science of banking and political economy involves deep and 
profound study, but these are not treated here, and the writer 
has attempted merely to give an idea of the daily routine of a 
bank. 

This can be stated with certainty. The interests of the public 
and the banks are identical ; and an acquaintance with banking 
customs will enable any man to conduct his business with much 
greater intelligence, satisfaction and profit. Also that banks want 
to accommodate, as far as possible, not only their own customers, 
but others, because they are possible customers. 

It is hoped that this writing, in some small degree, may hasten 
the time ; when the political orators, remembering that the day 
of the private banker has passed, and that the people now own 
the banks, will cease inciting the public against them ; when the 
law makers, elected by the stockholders and depositors of banks, 
will cease oppressing them by unequal and unjust taxation ; when 
the public generally, realizing the necessity and importance of 
banks to every community, will cease being prejudiced against 
them and their ways, and, by reason of a better understanding, 
will feel closer and more cordial toward them. 

So "here's to a better acquaintance" between the public and 
the banks. 

The Choice of a Bank 

The choice of a bank should be most carefully considered, 
especially by a business man. 

The same care should be exercised in selecting a bank as 
would be used in choosing your lawyer or your doctor. Having 
done this, make it a rule to be as frank and open and straight- 
forward with your banker as with your lawyer or your doctor. 
You will never lose by it. All banking relations must be founded 



II 

on mutual confidence. Once let your banker get the idea that 
you have deceived him, and naturally he is forced to view your 
statements with suspicion. Tell him the whole truth about your 
business and your resources, even though it hurts sometimes. 
It is primarily to his interest to help all his customers build up 
their business as much as possible, and to keep them going, and 
your success contributes to the general success of your bank. 
He should be, not only your banker, but your intimate financial 
adviser and your very good friend. 

In deciding upon your bank, did you inquire into the char- 
acter and disposition of its President and Cashier ? Are they men 
whose business sagacity and honorable careers are such that you 
are glad to seek their advice ; and can you repose every confidence 
in their keeping inviolate your business secrets? Will they fulfill 
to the letter their promises of protection to the best of their ability 
in times of financial stress? Or, have they exaggerated their 
resources and facilities and made all kinds of suave, but very 
general promises in order to get your account? 

Have you gone a little further and considered the personnel 
of the Board of Directors of your chosen bank? That Board is 
supposed to approve or disapprove all loans and business arrange- 
ments. Or, did you open your account with some bank merely 
because of convenience of location, or because some friend sug- 
gested that institution? 

Opening a Bank Account 

In opening your account with a bank, you will be asked to 
give your signature and your address. Write your name natural- 
ly, as you are in the habit of signing it. The paying teller has to 
accustom himself to the peculiarities of the signature of every 
patron of the bank, and has to be constantly on the lookout for 
forgeries ; for if he pays a forgery, the bank must stand the loss. 
He soon gets to know your signature as he knows your face. 
So don't have your signature on the bank's books as, John P. 
Williams, for instance, and then sign numbers of your checks, 
J. P. Williams. The letter "J" might stand for James or Joseph, 
and, if the account is in the name of John P. Williams, the bank 
is taking an unreasonable risk in paying out your money on a 
check signed, "J. P. Williams." It would have to make good any 
loss that might result thereby. A woman, for instance, will 



12 

open an account as Florence Perkins Smith, and then send out 
checks signed "Florence P. Smith ;" or "F. P. Smith ;" or if mar- 
ried, will sign, Mrs. Harry B. Smith. 

Then the paying teller must see that every endorsement on 
the check is technically correct. For instance, that a check made 
payable to John P. Williams is not endorsed "J. P. Williams," 
and again that a check payable to "J. P. Williams, Trustee," is 
not endorsed by J. P. Williams only, and not as "Trustee." 

Before going to the paying teller's window you should endorse 
any check you are collecting ; even though it is made payable to 
"Cash" or to "Bearer." If the check should turn out "no good," 
the teller can then see at a glance who cashed it, and communi- 
cate with the proper party. Below your endorsement write what 
sort of money you want, whether gold, silver, or currency, and in 
what denominations. Compliance with these points saves much 
delay. 

Every check should be endorsed exactly as it is made payable 
on its face. Many firms, as well as individuals, overlook this 
point daily. 

The paying teller must watch for raised or altered checks. 
The law holds that any legal instrument is void if altered in any 
material way. 

So many people, if they make a mistake in writing a check, 
will erase or alter the amount or the name, instead of taking a 
little more time and making out a new one. The banks have 
to be very cautious and particular about paying such checks, 
for they are paying out actual cash on doubtful orders. Accord- 
ing to law, they must suffer the consequences if they pay to the 
wrong person or pay the wrong amount. 

But all depositors must use every reasonable precaution to 
keep their checks from being altered in any way. Many people, 
especially in the rural districts, write checks in lead pencil. How 
easy it is for such checks to be changed if they fall into the hands 
of dishonest parties. The rejection of the account of any person, 
who will be so careless, is plainly only the part of safety. 

The figures should be placed close to the dollar mark. In 
writing the amount of the check in words, begin close to the left 
hand margin, and when the amount is written, draw a line in 
the blank space left between the amount, and the word "dollars." 
The law says that where the figures and the written amount dif- 
fer, the written amount shall govern. 



i3 
How to Deposit 

In making your deposit, always head your deposit ticket with 
your name exactly as you wrote it when leaving your signature 
with the Paying Teller, otherwise, it might be credited to some 
other person. Also, fill in the amount of your deposit as plainly, 
and as legibly as possible. After the receiving teller has checked 
off your deposit ticket, it is passed on to the individual book- 
keeper who has charge of your account. He is only human, and 
any bad figures on your ticket may lead to mistakes and con- 
sequent irritation to you. 

Always make out your own Deposit Ticket. The Receiving 
Teller should not be asked to do this. There are generally other 
people in line, and they, as well as the Teller, have a right to 
complain if he has to stop and do this for you. 

Follow exactly the headings on the ticket. Checks on cities, 
other than your own, should be set down under the heading 
"Foreign ;" and checks on banks in your city under "City 
Checks." Let the checks follow in order as they are listed on 
the ticket. Add the totals of these two headings separately and 
extend them as shown on the ticket. List your money separately 
into currency, gold and silver. Then add all your totals into one 
grand total at the bottom of the ticket. 

When depositing currency arrange the bills so that the ones 
and twos will be together, the fives together, the tens together and 
so on. Have the bills straight and face upward. With the gold 
and silver follow the same idea. If your deposit is large put 
the money in packages and label with amount and your name. 

By following these directions you will put the Receiving Teller 
under everlasting obligations. He has a very short time in which 
to accomplish a great deal, and his position at best is nerve 
racking. 

In endorsing a check, either simply write your name on the 

back, or write "Pay to the order of Bank" 

and then sign your name. When a check is undoubtedly intended 
for you, and your name is not stated correctly on its face, endorse 
it exactly as it is made payable, and then endorse as you gen- 
erally do. For instance, if a check intended for Brown Bros. 
& Co. is made payable to Brown Bros., it should be endorsed 
first Brown Bros., and then Brown Bros. & Co. 

Checks should be deposited or cashed promptly. You have 



14 

only until the next succeeding business day in which to collect, 
or deposit for collection, any check. If you hold a check longer 
than forty-eight hours, and the bank on which it is drawn should 
fail in the meantime, you have released the drawer and must 
take your chances with the other claimants against the bank. 
For this reason the banks send out all checks deposited with them 
for collection on the same day, or the next succeeding business 
day; otherwise they have released both the drawer and the 
endorsers, if the paying bank should fail or any loss should result 
by reason of their delay. 

Checks drawn on banks in the same town, and which are 
deposited after the clearing hour, are held over at the depositors' 
risk, until the next day. 

Your Account on the Bank's BooRs 

There is no mystery about bank bookkeeping. It is about 
the simplest known. The total amount of your deposit is added 
to the balance you already have in the bank ; then the total 
amount of your checks, that reach your bank that day, is 
deducted ; the result is your balance. 

Right here it is well to emphasize that the great majority of 
the banks keep no record of the names of the parties, from whom 
tyou receive checks which you deposit; nor do they keep any] 
record of the names of the people, to whom you make your checks 
payable. 

When you deposit a check, the only record generally kept by 
the banks is the date that you deposited it, the amount, and the 
town in which it is payable. If it is on a bank in the same city, 
your bank will keep a record of the name of that bank, but not 
otherwise. 

In handling thousands of checks daily, it can be seen what 
a stupendous task it would be for a bank to keep a complete 
record of the drawers and all the endorsers on every check. Its 
force of clerks would have to be doubled or trebled. 

The bank should not be expected to keep your private memo- 
randa, and it is the duty of the depositor to keep a complete record 
of the parties, from whom he gets the checks, that he deposits 
or cashes. 

If a check is lost in the mails, the bank has a perfect right, 
after giving the depositor the amount, the date on which it was 



i5 

deposited, and the town in which it was payable, to charge the 
amount to the depositor's account until he furnishes a duplicate 
of the lost check. So, if you cash a check drawn by John B. 
Smith, for example, and payable to James A. Jones, and then 
endorsed by several other parties ; it is your duty, and not the 
bank's, to keep a record of the person from whom you received 
that check, and obtain a duplicate if it is lost before reaching its 
destination. Also with all other checks which you deposit or cash. 

Many retail firms cash checks for customers ; and after en- 
dorsing, will deposit them for collection ; keeping absolutely no 
record of the sources from which they received them. For ex- 
ample, — Mrs. Brown, of St. Louis, receives a check from her 
son in Cincinnati. She gets it cashed at the dry goods store with 
which she deals. Then the merchant deposits it, with numerous 
other checks, in his bank for collection. If the check is returned 
unpaid, the bank certainly has a perfect right to call on the mer- 
chant to pay it. The merchant then calls on Mrs. Brown to pay 
him. Now if that check is lost in the mails, say burned in a rail- 
road wreck, the bank has the same right to call on the merchant 
for a duplicate. And it is no valid excuse for him to say that he 
has no record of the person from whom he received it. 

In short, each person endorsing a check should keep a record 
of the person from whom he received it, or for whom he en- 
dorsed it. 

On the last business day of each month your pass book should 
be left at the bank, in order that your checks may be entered 
therein, and returned to you ; comparisons made with the bank's 
ledgers ; errors, if any, corrected ; and your balance stated in your 
pass book. Then you should assort your cancelled checks ac- 
cording to the dates or numbers of same, and compare them with 
the stubs in your check book. This is very important in order 
that you may detect any forged or raised checks and promptly 
inform your bank. If such checks are not reported to the bank 
in a reasonable time, you will have to stand the loss. The total 
amount of the checks not returned by the bank should be the exact 
amount of the difference between the balance as shown by your 
check book and your bank book. For example, — you give a check 
on the last day of the month; it does not reach your bank until 
the first, second or third day of the next month. It can not be 
charged to your account until it does reach your bank ; therefore, 
your pass book will generally show a larger balance than your 



i6 

check book. The difference is the amount of checks that are out. 
Banks do not like to tell the amount of your balance over the 
telephone. They can not identify you "over the 'phone," and 
some person, who has no business to know, may be inquiring into 
your affairs. For the same reason they do not like to state the 
amount of your balance to any one in person, unless you authorize 
it. That is a confidential matter between you and the bank, and 
they make this rule for your protection as much as their own. 

Stopping Payment of a Chech. 

If, for any reason, you desire to stop payment on a check; 
communicate with the paying teller as quickly as possible. Give 
him a full description of the check, the name of the party to 
whom it is made payable, the number, the date, and the amount. 
Then always confirm this action in writing. If, after examina- 
tion of your checks, the bank informs you that this particular one 
has not been paid, you can safely issue a duplicate, if desired. 
Inform your bank, however, that you are issuing a duplicate, 
and write the word "duplicate" across the face of the check. 

How the Bank Collects the Checks you 
Deposit 

When your deposit is handed in to the Receiving Teller, he 
assorts the checks you give him into "foreign" and "clearing" 
items. 

The "foreign" items, that is, checks or drafts on banks in 
other towns, are then passed on to the route clerk. He, in turn, 
assorts them so that they may be sent to the banks that will collect 
them for the least possible cost. For instance, if your bank is 
situated in the middle West, the checks you deposit on the far 
West will be sent to a Chicago or St. Louis bank. Checks on 
Eastern cities, except New York possibly, will be sent to Phila- 
delphia or Baltimore. Checks on nearby towns probably will be 
sent direct to banks in those towns. The reason for not sending 
checks direct to the towns on which they are drawn, is, that 
often they can be collected much more cheaply by sending them 
through other large cities. 

The less expense your bank incurs in collecting, the less it 
will have to charge you. The depositor should understand, that 
the bank's charges for these collections are figured at about cost. 



*7 

« 
Also, that there is very little, if any, profit in these collection, or 

"exchange" charges. Whatever the bank charges you for col- 
lecting is credited to its "Exchange Account ;" but what the bank 
at the other end charges your bank for sending back the money, 
or remitting its check on one of the large cities, must be charged 
to its "Exchange Account." 

It is a fact that an examination of this account on the books 
of any city bank almost invariably will show that it is a source 
of loss rather than profit. In other words, the city banks really 
charge their depositors less than it actually costs for collections 
on other towns. 

The "clearing" items, that is, checks on banks in your own 
town, are passed to the Clearing House clerks. The collection 
of these checks through the Clearing House, and the operation 
of that institution, are next explained. 

The Clearing House 

The Clearing House is simply a meeting room for the con- 
venience of the different banks in a city ; a place in which to 
swap checks. Small towns have none. This meeting room is 
arranged almost exactly like the ordinary school room. There 
is a desk on a platform for the manager, also desks in rows on 
the floor, one desk for each bank. Ordinarily no figuring is done 
here except addition and subtraction. Its operation is simple. 

Suppose you owe Brown $10.00, and you owe Jones $5.00. 

Then suppose Brown owes you $5.00, and owes Jones $4.00. 

Then suppose Jones owes you $3.00, and owes Brown $5.00. 

Now, instead of each of you going around to two other places, 
you three meet in a certain conveniently located room to square, 
or clear up, accounts. This saves time and steps. A clerk is in 
this room to do the sums for you. 

With a little addition and subtraction he has the following: 

You owe Brown and Jones together $15 00 

Brown and Jones together owe you 8 00 

Therefore, you owe Brown and Jones together $7 00 

You and Jones together owe Brown $15 00 

Brown owes you and Jones together 9 00 

Therefore, you and Jones together owe Brown $6 00 



18 

You and Brown together owe Jones $9 00 

Jones owes you and Brown together 8 00 

Therefore, you and Brown together owe Jones $1 00 

The clerk then announces that you owe $7.00 here ; Mr. Brown 
is entitled to receive $6.00, and Mr. Jones is entitled to $1.00. 
Then he gives Mr. Brown an order on you for $6.00, and Mr. 
Jones an order for $1.00. Nothing complex about this if you 
know how to add and subtract. 

Now just substitute for your name, the First National Bank; 
for Brown's, the Second National Bank; for Jones', the Third 
National Bank. Then put the figures up into the thousands or 
hundreds of thousands of dollars in place of the small ones given 
above. Then name the room where you met, the Clearing House, 
and call the clerk who did the sums, the Clearing House Man- 
ager. Then call the orders he has given, the Clearing House 
Manager's checks. No matter how many banks in any one city, 
or how large the figures, this simple method of settling is in 
operation daily. 

Say there are twenty banks in your city. Your bank receives 
through the mails, and from its local depositors, numbers of 
checks on the other nineteen banks in the same town. The clerk, 
who goes to the Clearing House, and his assistants assort these 
checks into nineteen different piles. Each bank goes by a number 
at the Clearing House. Then these Checks are stamped on the 

back about like this — "Paid through the Clearing House ;" 

then follows the date, and name, and number of the bank which 
sends them. These nineteen piles of checks are added up into 
nineteen different totals ; the checks on each bank being kept in 
separate bundles. The nineteen totals are added into one grand 
total. The clerk then starts for the Clearing House with nine- 
teen bundles of checks ; and a sheet which shows how much his 
bank has against each of the other banks ; and the grand total it 
has against all the other banks combined. Therefore, at a cer- 
tain hour, generally noon, on each day, twenty clerks, one from 
each bank, meet at the Clearing House. Each one takes his stand 
at his desk. When the manager taps the bell, every clerk makes 
the round of all the other desks, and leaves the bundle of checks 
he has against each bank with a slip showing the total amount 
of the package. When this is over, each desk has nineteen 



*9 

bundles of checks on it and nineteen slips showing the different 
totals. 

Each clerk then adds up these nineteen totals, and the grand 
total resulting shows what all the other banks have against his 
bank. He then reports two amounts to the Manager of the Clear- 
ing House, — the grand total of the checks he has brought in, and 
the grand total of the checks which have been brought in against 
him. 

Say he has brought in $100,000.00 worth of checks against 
the other nineteen banks, and they have brought in $90,000.00 
worth of checks against his bank. Then his bank has a credit 
at the Clearing House of $10,000.00. 

After the Manager figures up from these totals handed him 
by the different bank clerks, he finds that certain banks brought 
more than was brought against them, and that certain other banks 
brought less than was brought against them. He then issues his 
checks, signed as Manager of the Clearing House, payable to the 
banks having a credit. These checks, of course, will be drawn on 
the banks which brought in less than was brought against them, 
or on the banks which are debtor to the Clearing House. 

Each bank clerk can see readily, from the grand total of what 
he took to the Clearing House, and the grand total of what was 
brought against him, whether his bank has "beat" the other com- 
bined banks, or whether the other combined banks have "beat" 
his bank; that is, whether his bank is a creditor of, or debtor to 
the other banks combined. 

All the clerks then leave for their respective banks and turn 
over the nineteen bundles of checks to the Paying Teller. This 
Teller has to look at each check and see that the date is all right, 
the signature is genuine, that no alterations have been made, and 
that all the endorsements are correct on every one. All these 
checks are then added up again, to verify the Clearing House 
Clerk's account, and then are assorted and passed to the indi- 
vidual bookkeepers to be charged up against the different de- 
positors' accounts. 

In the meantime, the Manager of the Clearing House has 
balanced the accounts of the various banks, and has issued his 
checks. The banks, that have a credit at the Clearing House, 
send a messenger for the checks payable to them and drawn on 
the debtor banks. 

On receiving these Clearing House checks, the creditor banks 



20 

either can collect them in actual cash from the debtor banks ; or 
they can hold them and return to the Clearing House the next 
day as part of their checks against the other banks. If the 
creditor banks want to build up their actual holdings of cash, they 
collect the Clearing House checks ; and, if they hold over these 
checks, they do so at their own risk. If the debtor bank should 
fail over night, the creditor bank must suffer any loss. 

In a few of the cities the Clearing House Manager does not 
issue his checks, and the banks, after they are informed as to the 
result of the daily balancing, either settle with each other by 
buying or selling their checks on other cities, or the debtor banks 
send the actual cash to the Clearing House to pay the creditor 
banks. 

But while the systems employed at the Clearing Houses of 
the various cities of the United States may vary in some partic- 
ulars, they are all founded on the principles stated in the pre- 
ceding paragraphs. These principles have been so perfected that 
the clerks from the different banks are at the Clearing House 
for a few minutes only each day. The Manager imposes a fine 
of several dollars on the bank for every mistake in calculation its 
Clearing House clerk makes; also for tardiness. If the bank is 
more than ten minutes late, it is not only fined, but is "shut out" 
from the Clearing House for that day. It then has to send its 
clerk around to each one of the other banks and collect the amount 
of its checks on each bank. 

To return to the checks which have been brought back from 
the Clearing House. If, on examination, the Paying Teller has 
discovered any forgeries, or irregular or missing endorsements, 
or anything suspicious about any checks ; or if the bookkeepers 
have found that any check overdraws the account of the de- 
positor, the bank has only until the close of banking hours to 
return such checks and collect from the banks that sent them 
through the Clearing House. So the examination of these checks 
must be made carefully and very quickly. 

The "Clearing House Association" in your city is what might 
be called a Mutual Aid Society, which the banks have organized 
for purposes of mutual convenience and protection. This Asso- 
ciation pays the expenses of the Clearing House ; the Manager's 
salary ; the rent ; etc. It adopts rules and by-laws and fixes fines 
and penalties for breaking them. But it is not an incorporated 
body and can not sue or be sued. 



21 

Among other things, it names the rates of interest to be 
allowed on time deposits and on the daily balances of the coun- 
try banks; also the charges to be made for collections. 

In time of panic, the Association is a tower of strength, not 
only for the banks themselves, but for the whole community. The 
associated banks, at such times, have it in their power to make 
or break the business interests of their city. But their interests 
are identical with the interests of their patrons. Remember the 
banks are owned by the people, not by two or three private indi- 
viduals. The failure of any one bank, or of any one business 
house, increases the panicky feeling. Therefore, the Clearing 
House Association naturally and from very self-interest, must 
do its utmost to keep its members and their customers on their 
feet. In financial storms, the Association may adopt certain rules 
and regulations which may seem unreasonable to the public; but 
these methods are put in force for "the greatest good of the 
greatest number;" not only for the protection of the banks, but 
of their customers and depositors. It is a time for the public 
to be as reasonable as possible ; to uphold the banks and their 
officers and directors. It is a time for the public and the banks 
to come closer together. Rest assured the banks have no desire 
to see any firm or person fail in times of panic, or any other time. 
They make their largest dividends when business is brisk and 
everything is prosperous. 

What every Clearing House Association does want to wipe 
out however, is the dishonest and reckless banker. He is a 
menace and source of anxiety to every bank in the community. 
The sooner the other banks can detect and expel him from the 
business, the better. In some cities, notably Chicago and St. 
Louis, the Clearing House Association regularly employs expert 
accountants to make periodical and unexpected examinations of 
the banks in the Association. If any bank is found to be doing 
a reckless business and not living up to the rules and regulations 
of the Clearing House, it is heavily fined or expelled. And ex- 
pulsion from the Clearing House means ruin for that bank as 
soon as the business community learns of it. All Clearing House 
Associations should adopt this strict supervision. 

Many a bank was saved embarrassment and possible failure 
in the recent panic of 1907 by the wise methods put into effect 
by the Clearing House Associations. Selfishness and enmity were 



22 

ordered to the rear. There are always banks whose officers have 
less foresight and wisdom than others. Some of these had been 
lending too freely, and their actual cash reserves were not suf- 
ficient to meet the storm of checks of their frightened depositors ; 
frightened mainly because of ignorance, for, with a few excep- 
tions, the banks were in good condition. To call in their loans 
and replenish their supply of cash would cause business failures 
and add to the panic. 

So the Clearing House Associations of the different cities 
determined that the strong and wise banks should help the weak 
and foolish ones. Loan Committees were appointed to sit daily 
at the Clearing House. The various banks brought to this Com- 
mittee notes they had discounted, or stocks and bonds owned by 
them. If the Committee thought them good, the Clearing House 
Association would lend the bank bringing them, up to about 75% 
of their face value. Of course, the Clearing House Association 
did not lend these banks actual cash, but they issued them Clear- 
ing House certificates, bearing interest, which could be used 
among the banks in settling daily claims against each other; just 
as if the banks had deposited actual cash at the Clearing House. 
In this way if Bank, Number One, had the Clearing House Man- 
ager's check on Bank, Number Two for $50,000.00, in settlement 
of some daily balancing at the Clearing House; Bank, Number 
Two could pay Bank, Number One, with Clearing House cer- 
tificates instead of actual cash. In other words, the banks which 
had a number of good notes, or stocks and bonds, but a small 
amount of cash, were saved by the combined, unselfish and patri- 
otic action of all the banks working together for the common 
weal. 

Suppose the bankers had been the monsters of selfishness 
they are sometimes painted? The strong and wise banks would 
have let the weak and foolish ones fail ; and, when the storm had 
passed, there would have been fewer banks in existence and the 
strong ones would have had that many more depositors and that 
much more business, with less competition. If the public gen- 
erally knew of the many instances of generosity and unselfish- 
ness that were shown in the Clearing Houses in this and other 
panics, the banks, as a class, would not be denounced and con- 
demned as they sometimes are. And this unselfishness was not 
exercised by the banks for the salvation of the banks alone, but 
for the business interests of the whole community as well; for, 



23 

as has been pointed out, the interests of the banks and the people 
are one. 

A Certified Check 

Your check is nothing but a piece of paper on which is written 
an order on your bank to pay some one a certain sum. Strangers 
might not like to accept this piece of paper in payment of debts 
due them. In many cases your check should be "certified." 

When a depositor presents a check to his bank to be certified, 
it should be handed to the Paying Teller. He, in turn, hands 
it to the individual bookkeeper having charge of that depositor's 
account. If the bookkeeper finds the balance sufficient to cover 
the amount of the check, he stamps across its face the words 

"Good for $ (the sum named in the check) when properly 

endorsed." Then the Teller or some officer of the bank, signs 
that statement and the amount of the check is immediately 
charged to that depositor. In other words, the bank guarantees 
or certifies that your check is good. 

The bank must be very particular about certifying a check. 
If any officer or employe of a National Bank certifies a check, 
which calls for more than the maker of the check actually has 
to his credit, such officer, or employe, has committed a peniten- 
tiary offense. This provision of the National Banking Act is 
most strictly enforced, and the penalty is severe. 

When certification is necessary, the maker of the check should 
be the one to have it certified. If you take Brown's check to his 
bank and have it certified, you release Brown entirely and can 
only hold the bank. For example, — a man sold a piece of land, 
and, on delivering the deed, took the purchaser's uncertified 
check. After the purchaser had left with the deed, the seller, 
thinking the check might not be good, had it certified. The bank 
failed that afternoon. The purchaser proved that he had more 
than the amount of the check to his credit on the bank's books. 
On consultation with his lawyers, the seller found that he had 
no claim on the drawer of that check and could only file his 
claim against the bank with its other depositors. And he only 
received about fifty cents on the dollar when the bank's affairs 
were finally wound up. All because he did not insist on the 
purchaser of the land having his own check certified. If he had 
done this he could have held both the purchaser and the bank. 



24 

By having your check certified, you practically exchange your 
check for one guaranteed by the bank. For example, — the bank 
certifies your check for $100.00. It immediately charges your 
account with the $100.00, and credits its "certified check account" 
with $100.00. Then when your certified check comes back to 
the bank, through the person to whom you delivered it, the bank 
charges its "certified check account" with $100.00, and the trans- 
action is closed. 

Therefore, if, for any reason, you decide not to use a check 
after you have had it certified, do not destroy it as you would an 
uncertified check. Be sure to bring it back to the bank so that 
the amount may be credited your account, and be charged to the 
bank's "certified check account." 

Otherwise your account will remain charged with the amount 
and your balance will show that much less. 

Protesting Notes, Drafts, etc. Why neces= 
sary and how it is Executed 

Protesting notes, drafts, checks, or other commercial paper 
is simply warning or giving notice to people, secondarily liable 
on that paper, that it has not been paid when due. The person 
who ought to pay the paper is primarily liable. All other per- 
sons, who have endorsed the paper or drawn it on another per- 
son, firm or bank are secondarily liable. 

You have endorsed Brown's note. Brown does not pay it 
when due. If you do not receive a prompt notice of this, you 
might endorse another note for Brown under the false impres- 
sion that he had paid the first one. 

Likewise, if you have endorsed Jones' draft on his firm, or 
his check, and his firm, or his bank refuses to pay such draft or 
check, both you and Jones should receive prompt notice that pay- 
ment was refused. With such notice you would not endorse for 
Jones a second time unless he made good to you, and explained 
matters satisfactorily. If Jones was honest in drawing his draft 
or check he is entitled to prompt notice of non-payment so that 
he can take immediate steps to get his money. Possibly his firm 
is embarrassed financially, or his bank has failed. 

Say Smith & Co. have drawn a draft on a customer and have 
taken it to a bank and secured the money on it. If the customer 
refuses to pay the draft, the bank wants prompt notice so it can 



25 

collect from Smith & Co. And Smith & Co. want prompt notice 
so they can take legal steps at once to protect themselves, and 
probably stop further shipments to this customer. Various other 
instances might be given where endorsers or drawers of paper 
might suffer loss or damage from lack of notice of its non-pay- 
ment. 

The law holds that this giving of notice is of such grave im- 
portance, that, if the bank receiving paper for collection does not 
promptly notify all persons, secondarily liable, of non-payment, 
all such persons are released from obligation, and the collecting 
bank must take its chances on making the amount from the 
payer. This statement must be qualified to this extent. If a 
check is not protested, the maker of the check must prove that 
he has suffered loss by not receiving notice of non-payment. 
But the drawer of a draft, or the endorsers on any check, draft, 
or note are released, whether they suffer damage or not. Gen- 
erally speaking, a check is a written request of a depositor to 
his bank to pay a certain sum to a certain party; whereas a 
draft is a written request of any one to a firm or individual, to 
pay a certain sum to a certain party. 

Of course, if the bank receives orders from the parties send- 
ing them, not to protest certain notes, checks, or drafts, it must 
obey these orders. But if no such instructions accompany the 
paper, the bank must protest or make itself liable. 

Every bank of any size has one of its employes appointed a 
Notary, or it can employ a Notary on the outside. He is an 
officer appointed by the State, and is under bond to the State to 
perform all his duties according to law. 

When the bank hands protestable paper to a Notary, it is his 
duty to make a formal demand at the proper place on the person 
who should pay it. If payment is refused, the Notary makes an 
exact copy of the note, draft or check at the top of a printed 
form used for this purpose. Then, over his signature as a Notary, 
accompanied by his official seal, he states that he has made a 
demand in person for payment of the paper described by him ; 
and, on payment being refused, he has "protested" the non-pay- 
ment. Also that he has mailed or delivered notices of this non- 
payment to all the parties secondarily liable on this paper and 
states their names. The Notary's official statement is called the 
"Instrument of Protest." The notices he mails are called the 
"Notices of Protest." Certain fees are allowed the Notary by 



26 

law for protesting. These are called "Protest Fees," and be- 
come a part of the debt. 

Of course, the person who ought to have paid the paper gets 
no "Notice of Protest." He certainly knows if he has not paid. 
The Notary must keep a copy of all his "Instruments of Pro- 
test." This is a public record, just as any court record is, and 
as accessible to the public. It is rarely examined however. 

So, from the language prescribed by law, that the Notary 
uses in his "Instrument of Protest" comes the common use of 
the terms "protest" and "no protest" paper. 

To bind the parties secondarily liable a Notary can protest 
paper only on the exact day it is due. Otherwise he might put 
it off several days, or demand payment before it was due, and 
damage might result in either case. So, if the protesting is not 
done on the exact date when the paper is due, it is of no avail. 

The maturity of a draft reading so many days, or months, 
after date must be calculated from the date of the draft itself. 
But the maturity of a draft reading so many days, or months, 
after sight must be calculated from the date it was presented to 
the sight of the payer and accepted. It is very necessary to date 
acceptances of time drafts reading "after sight." 

Demand for payment must be made at the proper place during 
business hours. A check of course is payable at the bank on 
which it is drawn, during banking hours. A draft on a firm is 
payable at its office; likewise a draft on an individual is payable 
at his office, or if he has none, then at his residence. Notes or 
accepted drafts are payable at the place stated on their face. 
But, when no place of payment is stated, demand for payment 
must be made at the office of the maker of the note, or the ac- 
ceptor of the draft ; or if he has no office, then at his residence. 
When you draw up a note it is the proper thing to state on its 

face "payable at bank" (giving the name of your bank) ; 

or "payable at my office ;" or "payable at my residence." 

Likewise, when accepting a draft, write the date, then "ac- 
cepted, payable at " (stating your bank, office, or resi- 
dence) across the face of the draft over your signature. There- 
fore when a note, or an accepted draft is made payable at a 
certain bank, demand for payment must be made at that bank, 
and not on the maker of the note, or the acceptor of the draft. 
Most notes and accepted drafts are made payable at the bank of 
the payer. All of them should be. Then the payer should give 



27 

his bank instructions to pay his notes and acceptances when pre- 
sented, just as it pays his checks. In this way, if you keep 
money enough in your bank to meet your notes and acceptances, 
just as you keep money there to meet your checks, the bank will 
save you all worry about their payment in case you or your 
bookkeeper overlook them. Under such circumstances your paper 
would never be protested. 

In accepting a note from a customer, do not have it made 
payable at your bank. Have the drawer make it payable in his 
own town and at his own bank. Demand for payment must be 
made at the exact place stated in the note. As every business 
man is particular about protecting his credit in his own town, 
and especially at his own bank, it is obvious that he will be most 
diligent about providing for the payment of paper, made pay- 
able at the bank with which he is doing business. 

Notes and accepted drafts should be sent, a week or two in 
advance of their maturity, to the town in which they are made 
payable. If paper, made payable at New Orleans, for instance, 
is not in New Orleans when due, proper demand for payment 
can not be made and the drawers or endorsers might be released. 

There is absolutely no law requiring a bank to send you a 
notice that it holds your note, or draft accepted by you, for col- 
lection and due at some future date. It is customary in some 
cities for banks to send such notices, but it is only a courtesy. 
It is your duty to keep account of when your paper is due, and 
to have funds at the place of payment when it is due. The banks 
that do so are very careful about sending out these notices, but 
the public should regard it as a favor shown them and not as their 
lawful right. Many people do not know or appreciate this fact. 
You should always put your street address just below your 
signature on a note so that notice can be addressed properly. 
Also, in drawing a draft, always put the name of the person or 
firm, on which it is drawn, in the lower left hand corner, and 
invariably state the street address. 

The Local Collection Department 

A bank has a perfect right to refuse to accept and to return 
any checks, notes, drafts, etc., sent it for collection. But if it 
does accept them, it must obey the instructions of the sender, 
literally and exactly. The bank has absolutely no right to dis- 



28 

regard these instructions, no matter how obnoxious or disagree- 
able they may seem to the payer of the paper. 

Many people regard all collectors as offensive and unwelcome. 
They wish to take their own time about paying their debts. 
Please mark this difference between the collector of your grocer's 
or druggist's bill, and the city bank as a collector of your note, 
or of a draft on you. The monthly collector must turn in cash 
for the majority of the bills given him or lose his position. But 
it really makes little difference to the bank whether you refuse 
or pay the note or draft that some other bank has sent it. 

The First National Bank in your city, for instance, receives 
most of the paper, sent it for collection, from banks in other 
cities with which it keeps an account. These are called corres- 
pondent banks. The First National Bank agrees to do all this 
collecting for nothing, and its correspondent banks in turn col- 
lect for the First National Bank, in their cities, for nothing. So, 
in the majority of cases, the bank receives nothing and loses 
nothing in the event of payment or non-payment of items on you. 

When collections are sent to a bank direct by firms, or by 
banks in another city, that do not keep an account with it; the 
collecting bank makes small fees, but these fees are very insig- 
nificant. 

So, by prompt payment of notes and drafts, you are con- 
ferring more of a favor on yourself than on the bank. It is 
wise to protect your credit with strange banks as well as your 
own. Every bank receives many confidential inquiries concern- 
ing the financial standing of firms and persons in its city. If not 
personally known to the officer in charge of this correspondence, 
he invariably inquires of the collection department as to the 
promptness with which the parties in question meet their notes 
and drafts. And even though you are not a patron, a bank in 
your own city would rather give you a good financial reputation 
than a poor one. 

The collecting bank must regard most carefully the instruc- 
tions of the sender, especially about protesting or not protesting. 
Also about telegraphing payment or non-payment, and whether 
to hold the paper after it is due or not. In no case must it sur- 
render any documents attached to a draft until the draft is paid, 
or accepted ; and, in case of acceptance, documents attached must 
not be surrendered unless the sender so directs. 

When drafts have Bills of Lading attached, and the draft 
states on its face that it is payable on arrival of the goods, the 



29 

bank can hold it until the goods arrive; but if the draft calls 
for payment on presentation, even though it has a Bill of Lading 
attached, the bank holding it, until the arrival of the goods, does 
so at its own risk. As has been stated, and it can't be stated too 
forcibly, the presenting bank has no option and must obey orders 
to the letter. If it does not, it must suffer any resulting loss. 
It is only an agent and can not regard the wishes of the payer. 

Another point you should bear in mind. The bank must not 
only pay strict attention to the instructions of the sender of the 
collection, but it must follow the law. In self protection a bank 
must keep itself informed about the laws regarding collections 
and any changes in these laws. 

If a bank accepts anything but the actual cash in payment of 
a collection, it does so at its own risk, and not at the risk of the 
sender. For instance, a bank has a draft on Smith, or holds 
Smith's note for collection. Smith offers his check in payment. 
If the check turns out "no good" the bank must recover the 
paper immediately, and any document which might have been 
attached ; otherwise the sender can hold the bank for the amount. 
Therefore, when you tender your check to a bank in payment for 
collections, you are asking them to take a risk. If you are not 
well known in the bank, it is only a reasonable request for the 
bank to ask you to have your check certified. Don't ask the bank 
to have it certified ; for, as has been explained in the remarks 
on "Certified Checks," the bank by so doing would release you, 
and could hold only the paying bank. You might just as well 
ask a strange bank to cash your check as to offer it your uncer- 
tified check for a collection on you. You would hardly cash a 
check for a stranger. Why should the bank take an equal risk 
for you ? Yet nothing seems to rouse the ire of the average man 
more, than for the collection clerk to ask him to have his check 
certified. 

It is a well-nigh universal rule in all Clearing House Asso- 
ciations, that the banks, which are members thereof, shall not 
collect checks on each other before the daily hour for meeting. 
Also it is a general custom not to collect from each other, checks, 
that are deposited, or taken in payment for paper due, after that 
hour. Hence, when a bank accepts uncertified checks in pay- 
ment before the clearing hour, it will know before closing time 
whether such checks are good. But, if a bank accepts an un- 
certified check in payment after the clearing hour, either, it must 



3° 

have it certified, and thereby release the drawer ; or, it must hold 
it until the next day at its own risk. The banks always respect 
the man, who has his check certified, if tendered after the clear- 
ing hour. 

For these same reasons you can see why a bank can not take 
a check on a bank in some other town in payment of a collection. 
It then would be several days before the bank would know 
whether the check was good or not. Also the bank would be 
out that amount of money for the length of time it takes to 
collect that check; for every bank must remit to the sender on 
the very day it puts its "Paid" stamp on a collection and delivers 
it to the payer. 

Therefore, when a bank notifies you that it holds your note, 
or a draft drawn on you, for collection, bear in mind four points. 
First: the bank must follow the instructions of the sender or 
owner of the paper. Second: it can not disregard the law. 
Third: you are benefitting yourself more than the bank by pay- 
ing your paper promptly. Fourth: the bank is taking a risk 
every time it accepts anything other than actual cash for a col- 
lection. 

The collecting bank can not consider the instructions of any 
one but the bank or persons from whom it receives the item. 
For instance, you live in St. Louis, and have sent your note to 
Brown & Co. of Bridgeport, Conn. Brown & Co. discount your 
note with their bank, or give it to their bank for collection. Be- 
fore it is due the Bridgeport bank forwards this note to a Phila- 
delphia bank, which in turn forwards it to a St. Louis bank. 
You are duly notified by the St. Louis bank. For various 
reasons you may not wish to pay. In that event, positively the 
only way to have this note recalled is for you to communicate 
with Brown & Co. Then they must request its recall by the 
Bridgeport bank, which in turn instructs the Philadelphia bank. 
Then that bank instructs the St. Louis bank to return the note. 
In other words, all instructions must come through the same 
channels by which the note was originally sent. Bear in mind 
that you are not the owner of this paper, nor is the bank which 
receives it for collection. 

When a draft has the words "with exchange" on its face the 
drawer is asking the payer, not only to pay the amount of the 
draft, but also the bank charges for collecting. Unless the pre- 
senting bank has instructions to collect this exchange or return 



3i 

the draft, it can accept the amount of the draft and deduct its 
charges when it remits for the collection. So don't feel resent- 
ment toward the bank when it asks you to pay collection charges. 
Many people do. But the bank is only following instructions 
and cares nothing whether you, or the fellow at the other end, 
pays the cost. 

Because it is human nature to object to paying out money, 
the Local Collection Department is the recipient of more com- 
plaints and unreasonable requests than any other department of 
the bank. Any number of actual happenings could be set down 
here, but a few examples will prove the truth of this statement. 

A bank received Brown's note for collection and sent him a 
notice to that effect. The note was made payable at Brown's 
bank and orders were to protest if not paid. On the day it was 
due Brown did not appear. The collecting bank telephoned 
Brown's bank and was informed that it had no instructions to 
pay his notes. Right there the collecting bank could have ceased 
its efforts to collect, and could have handed the note to its Notary 
for protest. But in a spirit of kindness and courtesy to Brown, 
the bank telephoned him half an hour before closing time, ask- 
ing him if he had not overlooked this note. Then Brown was 
mad. Said he had received no notice. That this was a nice 
time to be notifying him. The bank told him they had mailed 
him a notice, and Brown wanted to know how they could prove 
it. Then he was informed that the bank was not required by 
law to send him a notice, and that all he had to do, to avoid pro- 
test, was to instruct his bank to pay. By this time however, 
Brown was so unreasonably angry that the bank's clerk, in self 
respect, hung up the telephone to shut off the torrent of abuse. 
And all because the bank had tried to show extra consideration. 
Brown had sense enough to instruct his bank to pay that note, 
but he has never ceased to denounce the collecting bank for what 
he terms its unreasonable, overbearing treatment of him. 

A bank received a draft drawn on Jones. The orders were 
to protest if not paid. On presentation at his office Jones informs 
the bank that he does not think the draft is correct, and asks 
them to hold it until he can communicate with the drawer. The 
bank tells him it will have to protest if not paid that day. Jones 
insists that the bank can hold it. Among other things he says, 
that if he pays more than is really due the drawer of the draft, 
he may have trouble in recovering the excess ; but he does not 



32 

want the draft protested. The bank patiently explains to Jones 
that it will make itself liable if it does not protest. Then Jones 
becomes angry, and declares the bank extremely arbitrary. All 
because it would not take a risk that Jones himself did not want 
to assume. 

A bank received a draft on Smith with instructions to tele- 
graph if not paid on presentation. Attached to the draft was a 
bill of lading for a carload of wheat. On presentation Smith 
wanted the draft held until the arrival of the car ; so that he could 
examine the contents and be sure they were what he bought. 
But he did not want the firm, who drew the draft, to think that 
he would question their shipments. So he insisted that the bank 
should be accommodating enough to overlook its instructions. 
When the bank declined Smith became angry. He did not stop 
to reason it out that the bank, that sent the draft, probably had 
given the drawers the cash on it. And that the drawers might 
be unreliable and their bank might want to stop advancing cash 
on their drafts, if any were unpaid on presentation. Or that the 
drawers might want to stop shipping to Smith if he does not pay 
promptly. Many reasons may exist for these instructions to 
"telegraph if not paid." And the collecting bank will be liable 
for any damage resulting from its disregard of these instructions. 
But Smith will not see why the bank should not relieve him of 
an embarrassing situation. And the bank was not making one 
cent out of this collection. 

Now the law says that banks shall keep open during certain 
hours on every business day, which is not a legal holiday. After 
the closing hour there is a tremendous amount of work to be 
done. The tellers must balance their cash ; the bookkeepers must 
take off a balance of every account on their particular set of 
books ; and every check and draft deposited, or received through 
the mails, and payable in other towns, must be listed and for- 
warded for collection. Nothing can be held over without risk, 
no matter how heavy the day's work. The rule in every bank 
is to clean up all the work on the very day it is received. None 
of this daily balancing of cash, or books, can be commenced until 
the last check has been cashed, the last depositor has come in, and 
the last payer of a collection has settled. For instance, the pay- 
ment of a single draft or note after banking hours, necessitates 
the holding open of several sets of books or the erasure and 
changing of various totals by the bookkeepers. It is a very mis- 



33 

taken, but popular, idea that the bank employes practically are 
through with their duties at the close of banking hours. The 
fact is, that the usual hours for the employes are from eight 
till five, and it is no uncommon thing for the clerks and officers 
to be hard at work many hours after the business houses have 
closed. 

Yet many persons think the bank very disobliging if it refuses 
to transact business after hours. One unreasonable individual 
insisted that he had until sundown to pay his note on the day 
it was due. When the collecting bank told him it would be pro- 
tested if not paid before the end of banking hours, he became 
very abusive and wanted to know who gave that bank the power 
to say how late he could pay. He was politely referred to the 
law makers, but this did not lessen his resentment against the 
bank. 

The foregoing are statements of actual daily occurrences and 
are only fair samples of the injustice with which many persons 
treat the banks. And it is mainly the result of ignorance of the 
laws and customs, which the banks must obey. 

The Loan Department 

As a preface to the remarks on this department, the following 
simple and concise statement is taken, by permission, from that 
excellent book, "Money and Banking," by Mr. Horace White. 
(Book II, Chapter 1, page 235, Edition of 1895.) 

"FUNCTIONS OF A BANK." 

"A bank is a manufactory of credit and a machine of exchange. 
Mr. H. D. McLeod's analysis of the mechanism of banking is 
substantially this : A man has $5,000.00 of his own money. He 
starts a bank. His neighbors deposit $45,000.00 with him. This 
money becomes the absolute property of the banker. The depos- 
itors have simply a right to withdraw an equal amount whenever 
they like, which right can be enforced by law. The banker owns 
the money and the depositor has a claim, or right of action, 
against him for an equal sum. But the depositors will not draw 
the money out immediately ; if they had intended to do so, they 
would not have deposited it at all. The banker finds by experi- 
ence that some of his customers will deposit as much money as 



34 

others draw out, so that $50,000.00 is on hand all the time. He 
concludes that if his own $5,000 in connection with his good 
reputation, is considered by the public a guarantee for $45,000.00, 
then the whole $50,000.00 will serve as a guarantee for at least 
$200,000. When he begins, his balance sheet reads in this way: 

LIABILITIES. ASSETS. 
Deposits $45,000.00 Cash $50,000.00 

He now begins to discount the commercial paper of his 
customers running say ninety days at 6%. When he discounts a 
bill of exchange for $1,000.00, he deducts the interest for ninety 
days ($15.00) and credits the customer the remainder ($985.00) 
on his books. This $985.00 is called a deposit, because the cus- 
tomer has the right to draw it out by his check exactly as he 
could draw out an equal sum of gold deposited by him in the 
same bank. In the eye of the banker, and of the customer, and of 
the law, it is a deposit. In ordinary times it is like any other 
deposit. That is, the proportion remaining uncalled for at any 
time will be about the same as the proportion of actual money 
deposited. Yet it is nothing but a bank credit. Hence the word 
deposit, when thus used, is clearly a misnomer, since, by deriva- 
tion and common understanding, a deposit means a thing laid 
away, or given in charge of somebody. It must be borne in mind, 
therefore, that bank deposits consist of two different things, 
namely, (1) money, (2) bank credits, and that the latter may 
be four or five times as large as the former. 

The process continues till the banker has $500,000.00 of dis- 
counted bills in his portf^io. Then his accounts stand thus, — 

LIABILITIES. ASSETS. 

Deposits $242,000.00 Cash $50,000.00 

Profit 3,000.00 Loans & Discounts 200,000.00 



$245,000.00 $250,000.00 

This is Mr. McLeod's exposition and it is the correct one. 
It follows that the banker has manufactured something which 
serves as a medium of exchange to the extent of nearly $200,- 
000.00. This something is credit. Goods can be bought and sold 
with it as readily as with money, since the checks drawn against 



35 

these deposits are universally accepted. The whole $200,000.00 
of bills are not discounted in a lump, but gradually, so that some 
are always maturing and bringing money in to meet the checks 
of customers, in an endless chain of deposits and discounts. It 
is found in practice that $200,000.00 of loans and discounts may 
be easily carried on $50,000.00 of cash. Thus, the loans of all 
the National banks in the United States in October, 1894, were 
$2,000,000,000.00, and their cash (including silver certificates 
and silver dollars) was a trifle less than $400,000,000.00, or only 
one-fifth of the amount of the loans. The other four-fifths was 
credit, and perfectly sound credit too, for it had passed through 
one of the severest panics in our history." 

The foregoing quotation is an unanswerable argument for the 
need of banks as manufacturers of credit in every community. 
The greater the banking capital in any section, the easier it will 
be. for the people of that section to carry on and enlarge their 
business. 

The Loan Department is not only the most important, but 
it is the money-making end of the bank. If it makes no loans 
it will pay no dividends. If, on the other hand, it makes bad 
loans, it will go out of existence. 

It can be understood readily that the successful bank officer, 
whose duty it is to accept or reject loans, must be a person of 
large experience and wide knowledge of men and affairs. He 
must be an excellent judge of human nature. Not too conserva- 
tive, nor yet too venturesome. He must be a constant student 
of financial conditions ; and must expand or contract his loans 
as the sea of finance is placid or stormy. His responsibility is 
great. He must lend, but he must lend judiciously, millions of 
other people's money. He can not allow feelings of personal 
friendship to warp his judgment. He must be thoroughly familiar 
with the laws concerning the making and the collection of notes. 

In an address to the National Banks in 1863, the Hon. Hugh 
McCulloch, the first Comptroller of the Currency, gave this sound 
advice : 

"Do nothing to foster and encourage speculation. Give facili- 
ties only to prudent and legitimate transactions. Distribute your 
loans rather than concentrate them in a few hands. Pursue a 
straightforward, upright, legitimate banking business. Treat your 
customers liberally, bearing in mind that a bank prospers as its 
customers prosper. " 



36 

In lending, the bank should encourage the business interests 
of its community and should discourage speculation. 

If every one, before asking a loan, would put this question to 
himself, "Would I take this risk," his banker would be saved 
much embarrassment. On the other hand, if you know your 
security is good, there is no reason why you should feel any 
degree of awe or nervousness in offering your own or your cus- 
tomers' notes. That is what the bank is in business for, and 
your proposition, if not made for purposes of reckless speculation, 
is welcomed in ordinary times. 

Bear in mind, however, that your banker may, at times, have 
to refuse your paper, because he has seen clouds on the financial 
horizon of which the average person is ignorant, and he is endeav- 
oring to protect, not only his stockholders, but his patrons, from 
the storms that are imminent. It is advisable for you to consider 
his views carefully, and probably to curtail business expansion. 

Your average balance on the bank's books has a great deal 
to do with the amount of the loans, no matter how well secured, 
that you can ask reasonably. 

Every bank has a number of customers who expect to be taken 
care of in the loan department. But, if all the bank's patrons are 
borrowers, it soon will have loaned out all of its funds. The 
bank must have depositors also. While some depositors do not 
ask for loans, experience has shown that the proportion of a cus- 
tomer's balance to his loans must be sustained in order to keep 
the bank adjusted. In New York the banks generally require 
a regular customer to keep an average balance of not less than 
twenty per cent, of the loans made him. Most interior banks 
consider ten per cent, about the right proportion. For example, 
in the interior cities, if your account shows an average balance of 
$200.00, you can reasonably request loans, properly secured, of 
$2,000.00. An average balance of $1,000 should entitle the 
depositor to loans of $10,000.00 and so on. Experience proves 
that if the banker does not keep this important point in mind, 
his machinery will be "out of gear." 

Speaking generally, it will pay any concern to borrow money, 
if necessary, to show a fair balance to its credit. Bankers are 
only human, and all business is selfish. Every bank will be dis- 
posed to take care of its best paying customers first in times of 
financial storms. Every merchant looks out for his best customers 
first. Why not a banker ? When a firm attempts to hold its bank 



37 

down to the last cent of profit, keeps no balance to speak of, 
and subjects the bank to endless expense in the collection of its 
checks and drafts, it can not reasonably expect as liberal treat- 
ment in "squally times" as the concern which pursues the broader 
policy of "live and let live." 

Some firms, if they would figure it out, could see plainly that 
the bank was handling their account at a loss ; yet, they think they 
are conferring a great favor in placing their business with any 
bank. 

A large concern was pursuing this narrow policy. Among 
other things it made a practice of borrowing large sums in 
other cities at four or five per cent, when the local rate was six. 
The recent panic came on. Money advanced to fifty, to one 
hundred per cent in New York. The local banks were having 
all they could do to take care of their own good customers. The 
result was that this firm came to the verge of an assignment. 
And, if it had not happened that the banks of its city did gener- 
ously come to its rescue, it would have collapsed. 

It is well to remember, that, while the rates of interest in New 
York are temptingly low at times, they fluctuate violently and 
often without warning; also that the bankers in a strange city 
have no personal interest or local pride in your success or failure. 

Money is only a commodity, and rates of interest are gov- 
erned by supply and demand. Now the supply of money in the 
New York banks varies tremendously, by millions of dollars in 
fact. This variation comes from many causes. On the other 
hand, the demand for money in New York is constantly changing. 
The reasons for this are manifold. But in the smaller cities, both 
the supply and demand are much more uniform and steady. 
Hence the rates of interest, outside of New York, are much less 
liable to change. Therefore, unless the demands of your business 
exceed the banking facilities of your town, it is very advisable 
for you to confine your loans to the local banks. 

The loan department is restricted by certain laws, just as the 
other departments. State and Savings Banks, and Trust Com- 
panies must obey the laws of their particular State, but any bank 
having the word "National" as part of its name, or the letters 
"N. A." (National Association), or the letters "N. B. A." 
(National Banking Association) following its name, must adhere 
strictly to the provisions of the National Bank Act. The Congress 
of the United States has forbidden the use of the word "National" 



38 

as part of the name of any Bank or Trust Company which does 
not comply with all of the sections of the National Bank Act. 

As the statutes differ in each of the separate States, only the 
laws governing National Banks will be considered here. 

The whole spirit of the National Bank Act in relation to loans 
is to prevent the advancing of money on anything but "quick 
assets." In other words, loans must not be made on any security, 
that can not be turned into money quickly. For this reason a 
National Bank can not lend on real estate as a security. Also it 
should not accept notes having longer than ninety days or four 
months to run. The fundamental principle of the law is the 
guarding of the depositors' money; to have it ready for them at 
all times. But the whole fabric and theory of banking is founded 
on the fact, demonstrated by centuries of experience, that at no 
one time do all the depositors want to draw all their money from 
all the banks. Also that every day some loans are due and can 
be converted into cash if necessarry. 

Payment of demand, or "call," loans can be demanded any day. 
On time loans, payment can not be asked for until the maturity 
of the note, the day agreed upon by the bank and the borrower. 

On demand, or "call," loans the interest must be paid at the 
end of every three months, or when the loan is paid. On time 
loans, the interest, or discount, is paid in advance. 

Notes reading one, two, three, or four months after date are 
due, of course, one, two, three or four months after the date of 
the notes. But thirty, sixty, or ninety-day paper is not due in one, 
two, or three months. This is a common error. The exact num- 
ber of days must be calculated. The following table for deter- 
mining the maturity, or "due date," of thirty, sixty, or ninety-day 
paper is herewith given: 



39 



TABLE FOR FINDING MATURITY OF NOTES AND DRAFTS 

AT 30, 60, AND 90 DAYS 



DATED IN 
MONTH OF 


AT 30 DAYS 

Will be Due Same Date In 


AT 60 DAYS 

Will be Due Same Date In 


AT 90 DAYS 
Will be Due Same Date in 


JANUARY 


February less 1 day 


March plus 1 day 


April 


FEBRUARY 


March plus 2 days 


April plus 1 day 


May plus 1 day 


MARCH 


April less 1 day 


May less 1 day 


June less 2 days 


APRIL 


May 


June less 1 day 


July less 1 day 


MAY 


June less 1 day 


July less 1 day 


August less 2 days 


JUNE 


July 


August less 1 day 


Sept. less 2 days 


JULY 


August less 1 day 


Sept. less 2 days 


Oct. less 2 days 


AUGUST 


September less 1 day 


October less 1 day 


Nov. less 2 days 


SEPTEMBER 


October 


Nov. less 1 day 


Dec. less 1 day 


OCTOBER 


November less Iday 


Dec. less 1 day 


Jan. less 2 days 


NOVEMBER 


December 


January less 1 day 


Feb. less 2 days 


DECEMBER 


January less 1 day 


Feb. less 2 days 


March 


EXAMPLE.— Paper dated March 15th at 90 days is due June 13th. 

TO PROVE.— Exclude day of date, then 16 days in March, plus 30 days in April, 31 
days in May, 13 days in June equals 90 days. 

Paper apparently due, from this table, on February 30th, is, of course, due March 
2d, or apparently due April 31st, is, of course due May 1st. 

In Leap Year allowance must be made for 29 days in February. 

For paper payable in States allowing grace use table, then add days of grace. 




National Banks can lend only a certain proportion of their 
deposits. 

In New York, Chicago, and St. Louis, called Central Reserve 
Cities, National Banks must keep on hand, in lawful money, a 
reserve of twenty-five per cent, of their deposits. 

In Albany, Baltimore, Boston, Cincinnati, Cleveland, Detroit, 
Louisville, Milwaukee, New Orleans, Philadelphia, Pittsburg, 
San Francisco and Washington, called Reserve Cities, the 
National Banks must have the same reserve of twenty-five per 
cent, of their deposits. But the National Banks in these last- 
named thirteen cities can keep one-half of their reserve in National 
Banks located in any of the three Central Reserve Cities, viz. : 
New York, Chicago and St. Louis. 

In all other cities or towns the National Banks must have a 
reserve of fifteen per cent, of their deposits, but nine per cent, 
of their reserve can be kept in National Banks located in any 
of the thirteen "Reserve Cities ;" or in National Banks in the three 
Central Reserve Cities. 



40 

"Approved Reserve Agents" are the banks of the larger 
cities, selected by the banks of smaller cities or towns, in which 
to carry part of their reserve. These selections must be approved 
by the Comptroller of the Currency, the executive head of the 
National Banking System. 

A National Bank is forbidden to lend more than ten per cent, 
of its combined capital and surplus to any one firm or individual. 
"But the discount of bills of exchange drawn in good faith against 
actually existing values, and the discount of commercial or busi- 
ness paper actually owned by the person negotiating the same, 
shall not be considered as money borrowed." Also no National 
Bank can lend on its own stock as security. 

The Comptroller of the Currency can have an examination 
made, as often as he may deem proper, of the condition of any 
National Bank. The visits of the National Bank Examiners are 
never announced in advance. They come suddenly and without 
warning. Their duties are not only to balance the books and 
count the cash, but also critically to examine each loan and its 
security; and to give especial attention to loans to any director or 
officer, and to any concerns in which they may be financially 
interested. 

If the bank is overloaned, that is, has loaned more than the 
law allows, the examiner immediately reports it, and the Comp- 
troller of the Currency orders that bank to cease lending, and to 
require payment of enough of its loans to make good the reserve 
required by law. And if the bank does not court disaster and 
the closing of its doors, it hastens to obey orders and to "get 
in line." 

The supervision of the National Banks is not perfunctory or 
careless. It is very strict. 

The inquisitorial powers of the National Bank Examiners are 
practically unlimited. They have a legal right to put any bank 
officer on oath in questioning the affairs of the bank. They look 
into every department in the most searching way, and any dis- 
obedience of the law is reported promptly to the Comptroller. 
These Examiners are appointed by the United States Govern- 
ment; and if they want to hold their positions, they must be 
strictly impartial in their reports to the authorities. 

The provisions of the National Bank Act have been so rigidly 
enforced, that in forty-four years, or since the Act was passed by 
Congress, the average annual loss to depositors in National Banks, 



4i 

has been only thirty-seven one thousandths part of one per cent, 
of their deposits. Practically no loss at all. 

Isn't that a tribute to the wisdom of that law; to the strict 
supervision of the Government ; and to the honesty and integrity 
of the officers of National Banks ; past and present ? It has hap- 
pened, of course, that some spoilers have occasionally obtained 
control of a National Bank, and have dishonestly used the deposit- 
ors' money in risky ventures for their own profit. But the officials 
of the Treasury Department have soon sized them up, and such 
men shortly find the banking business not to their liking, especially 
with "Uncle Sam" as a supervisor. 



The Analysis of a Bank's Published 
Statement 

Few people know how to determine the strength, or weakness, 
of a bank from its published statement. The stockholders and 
depositors of any certain bank should watch for these statements 
and critically examine them. 

Every National Bank must make not less than five reports of 
condition during each year, to the Comptroller of the Currency. 

The requests for these reports come without warning, and 
at no particular time. Notices are sent on the same day to every 
National Bank in the United States ; and on receipt, each National 
Bank, within five days must send in an exact report of its con- 
dition at the close of business on a certain past date fixed by the 
Comptroller. This report must be sworn to by the President, or 
Cashier, of the bank ; and attested by the signature of three of its 
directors. Moreover, the bank must publish a copy of this report 
in some newspaper in its own town ; "or if there is no newspaper 
in the place, then in one published nearest thereto in the same 
county." Then proof of such publication must be furnished the 
Comptroller. 

An example of a National Bank Statement is herewith given. 



42 

REPORT OF THE CONDITION OF 
The , at 

in the State of , at the close of business, , 190 

RESO UR CES. D OLLARS. 

Loans and discounts $1,890,506.56 

Overdrafts secured and unsecured 5,549.52 

U. S. Bonds to secure circulation 2% 800,000.00 

U. S. Bonds to secure U. S. Deposits 4% 400,000.00 

Other Bonds to secure U. S. Deposits 437,095.55 

U. S. Bonds on hand 

Premiums on U. S. Bonds 4% 30,000.00 

Bonds, securities, etc 907,077.61 

Banking house, furniture and fixtures 100,000.00 

Other real estate owned 

Due from National Banks (not reserve 

agents) $600,554.31 

Due from State Banks and Bankers 348,032.09 

Due from approved reserve agents 400,050.42 

Checks and other cash items 865.62 

Exchanges for Clearing House 8,703.74 

Notes of other National Banks 19,455.00 

Fractional paper currency, nickels and 

cents 391.70 

Lawful Money Reserve in Bank, viz. : 

Specie 257,531.50 

Legal-tender notes 80,000.00 

Redemption fund with U. S. Treasurer 

(5% of Circulation) 40,000.00 

Due from U. S. Treasurer other than 

5% redemption fund 2,666.66 1,758,251.04 



Total $6,328,480.28 



43 

EXAMPLE OF 

A National Bank Statement 
Continued. 

LIABILITIES. DOLLARS. 

Capital stock paid in $1,000,000.00 

Surplus fund 200,000.00 

Undivided profits, less expenses and taxes paid 2,618.64 

National bank notes outstanding 800,000.00 

State Bank notes outstanding 

Due to other National Banks $1,744,106.37 

Due to State Banks and Bankers 738,439.16 

Due to Trust Companies and Sav- 
ings Banks 105,151.74 

Due to approved reserve agents 

Dividends unpaid 888.00 

Individual deposits subject to check 919,969.29 

Time certificates of deposit 426,465.22 

Demand certificates of deposit 

Certified checks 4,224.42 

Cashier's checks outstanding 24,500.36 

United States deposits 362,117.08 4,325,861.64 

Deposits of U. S. disbursing officers 

Bonds borrowed . 

Notes and bills rediscounted 

Bills payable, including certificates of deposit for 

money borrowed 

Reserved for taxes 

Liabilities other than those above stated 

Total . $6,328,480.28 



44 

In considering a bank statement, the first thing to be calcu- 
lated is the net amount of deposits on which the bank must keep 
the required reserve. The United States Deposits are not con- 
sidered, because United States or other approved bonds must be 
lodged with the Treasury Department at Washington, to secure 
them. 

To find the net deposits in the foregoing bank statement, the 
following form is used. (This method of calculation is in use 
by all National Banks, and from recent information from the 
Comptroller's office, is correct.) 

"ITEMS ON WHICH RESERVE IS TO BE COMPUTED." 



"Due to National Banks" __ ._. 

(Not reserve agents.) 
"Due to State Banks and 

Bankers" __ 


$1,744,106.37 

738,439.16 

105,151.74 

0.00 


$2,587,697.27 


$1,639,110.87 

888.00 
919,969.29 

426,465.22 

0.00 
4,224.42 

24,500.36 

0.00 


"Due to Trust Co.'s & Savings 
Banks". _ 

' Due to approved Reserve 
agents" _ - - 




"LESS" 

"Due from National Banks" 

(Not reserve agents.) 

"Due from State Banks & 
Bankers" ~_ _ 


$600,554.31 
348,032.09 


$948,586.40 


"Should the aggregate 




"Dividends v 

"Individual ( 

"Time cer 

deoosit" _ 


mpaid " 
leposits" 
tificates of 


'due from' exceed the (( -p. a , 
aggregate 'due to' banks, ^w^it" 
both items must be ttr S^ } u ' 
omitted from the calcu- ,<r w , 

lation '" standing" 

"Deposits o 
bursing Oi 


ertificates of 

scks" 
checks out- 

[ U. S. Dis- 
ncers". 


GROSS DEPOSITS 


$3,015,158.16 
$30,825.40 


"DEDUCTIONS ALLOWED." 


"Exchanges for Clearing House' 
"Bills of other National Banks" 
"Due from U. S. Treasurer ot 
Redemption Fund" 


) 


$8,703.74 
19,455.00 

2,666.66 




her than 5% 




MAKING NET DEPOSITS 


\ 




$2,984,332.76 





45 

Now the cash reserve of this bank, as it is located in one of 
the thirteen Reserve Cities, should be 12^%, or one-eighth of 
the amount of its net deposits. 

The Cash Reserve of this bank, (and the Cash Reserve of any 
National Bank must be determined from these three amounts), 
is the total of the following three items : 

"Lawful Money Reserve in Bank, viz.: 

"Specie" $257,531.50 

"Legal Tender Notes" 80,000.00 

And "Redemption Fund with U. S. Treas- 
urer (5% of circulation)" 40,000.00 

Making Total Cash Reserve $377,531.50 

Hence, to find the percentage of cash reserve to net deposits, 
divide the net deposits, $2,984,332.76 into the amount of total cash 
reserve, $377,531.50. The result is 12.6 per cent. Therefore, this 
bank is "in line" on its cash reserve. 

Next in order is to compute the percentage of the item, "Due 
from approved reserve agents," to the net deposits. Divide the 
net deposits, $2,984,332.76, into the amount "Due from approved 
reserve agents," $400,050.42. The result is 13.4 per cent. This 
bank is all right in this respect. Therefore, its total percentage 
of reserve is 26 per cent. 

It should be explained here that the item, "Due from approved 
reserve agents," means the total amount on deposit, subject to 
check, in National Banks, approved by the Comptroller, and 
located in other larger cities. These "approved reserve agents" 
allow two per cent, interest on these deposits, but the National 
Bank Act says, that at least half of the necessary 25 per cent 
reserve, of the banks located in the thirteen Reserve Cities, must 
be in their cash reserve. Hence, these banks are not complying 
with the law if they have, say ten per cent of their reserve on 
hand, and fifteen per cent, with "approved reserve agents." The 
authorities are very strict about enforcing this. 

An exceedingly strong bank may show frequently from its 
published statements, that technically it is "out of line" on a par- 
ticular day. Some very large checks of other banks unexpectedly 
miay have been brought against it on that day, and its cash reduced 
thereby. For this reason, the bank also furnishes the Comptroller 
with a statement of its percentage of reserve for the thirty days 



4 6 

preceding the date of his call for a report. So, while the per- 
centage of reserve to deposits is important, it is not the most 
material thing to be considered in judging the strength, or weak- 
ness of the bank. 

Take this bank, for instance. Regarding reserve, it is fully 
in line ; also in other respects, it is in a very strong condition. 
Its United States deposits amount to some $362,000.00. To 
secure these it has over $800,000.00 of bonds deposited with the 
United States Treasurer. In addition, it has over $900,000.00 of 
other bonds and securities. Its "Loans and Discounts" are, if 
anything, too small in proportion to its Capital and Surplus and 
Deposits ; but probably a meagre demand for money at the time 
this statement was published is the cause. Moreover, within a 
day or two, by checking on the banks that owe it; or, by tele- 
graphing these banks for currency, it could increase its "Lawful 
Money Reserve in Bank" by hundreds of thousands. Of course, 
there are no means by which one can determine that the "Loans 
and Discounts'' of a bank are secured properly. In respect to 
that, you can depend only on the reputation of the bank's officers 
and directors for wisdom, and prudence, and honor; together 
with the Government supervision. Also the items, "Bonds, securi- 
ties, etc.," may be worth the amount stated, or possibly this 
account may be a "dumping place" for all sorts of worthless 
securities. 

While a National Bank can not lend on real estate, it may have 
acquired real estate in its efforts to collect some bad debt, and 
the value of this may be very much overestimated in its published 
statement. The item, "Other real estate oivned," should be care- 
fully considered if the amount is large. As that real estate was 
obtained in endeavors to collect bad loans, it is reasonable to 
suppose that, if it was worth the debts for which it was taken, 
the bank would have sold it. In the great majority of cases, the 
very fact, that the bank is holding it, is good evidence that it 
can not now be sold at the figures given in the statement. Of 
course, it is possible that the value of this real estate may be 
enhancing rapidly, and that the bank is holding to make a goodly 
profit in addition to the debt, but this is not often the case. The 
National Bank Act forbids the holding of any real estate, except 
the bank building, for a longer period than five years. 

The item, "Bonds borrowed'' is used only when the bank 
prefers to borrow, instead of buying bonds to put up as security 



47 

for circulation, or United States, or State deposits. Bonds may 
be selling at a high price, and the bank borrows them, paying the 
owner a rental of say, two per cent. This is simply a question 
of business policy, and is nothing to the discredit of the bank. 

" Notes and bills re discounted" is in evidence when the bank 
has loaned out more money than its own resources justified, and 
it has had to replenish its funds by endorsing and rediscounting 
some of the notes of its customers with other banks. In some 
sections the banking capital is not adequate at all seasons. Take 
some Southern towns, for instance, when the planters are hold- 
ing the cotton crop for higher prices. Their notes being perfectly 
good, the banks try to accommodate them. Under such circum- 
stances the banks of that section must endorse these notes and 
borrow money on them in larger cities. Hence, when banks are 
"under rediscount" at certain seasons, it is not proof positive that 
they are in bad condition. Very good reasons for it may exist 
in that particular section and at that particular season. But it 
is well to be watchful of the bank that shows "notes and bills 
rediscounted" during the entire year. 

"Bills payable, including certificates of deposit for money 
borrowed," is exactly the same thing as the "Bills payable" of any 
merchant, and means that the bank has borrowed money on a 
note, or certificate of deposit, and has pledged certain notes of its 
customers, or stocks and bonds, as security. 

The item, "Reserved for Taxes," is used when the bank sets 
aside a certain sum from its Undivided Profits to meet its taxes. 
As the Capital, Surplus, and Undivided Profits are taxed, the 
bank, by putting a sufficient sum into the fund, "Reserved for 
taxes," can thereby give in that much less to the tax assessor. 

So, after all, in considering a bank, you must judge it, not 
only from its statements of condition, but from the character of 
its officers and directors. 

It is very nearly true that "the men at the head of the bank 
are the bank." Have you selected your bank accordingly? 

Banks, other than National, figure their reserves according to 
the laws of the different States. Only National Bank statements 
have been considered here. Every man should investigate the 
banking laws of his own State, especially in regard to super- 
vision and examination by the State authorities, and the reserves 
required. 



4 8 

New York Exchange 

Practically every bank in the United States keeps part of its 
funds in banks in New York City, the money center of the coun- 
try. All National Banks are allowed to keep part of their reserve 
in the National Banks of New York, Chicago and St. Louis, the 
three Central Reserve Cities. For these reasons checks drawn on 
banks in these three cities are generally accepted at par, that is, 
collected without cost to the depositor. 

In this connection, the word "exchange" comes from the fact 
that you exchange your personal check for the bank's check on 
another bank, located in some other city. 

In remitting for collections, or for balances due, the banks 
outside of the three Central Reserve Cities, generally send their 
checks on one of these cities, according to their location. 

Under certain conditions you will notice your local news- 
papers quoting New York Exchange at so much premium or so 
much discount. These rates are generally in use only between 
the different banks in your city. The banks do not charge a 
depositor any premium for its checks on other cities, unless the 
amount of the checks called for is large. 

The proper way to draw your check when you want New 
York Exchange, is to make it read "Pay to the order of New 
York Exchange." The bank then makes out its check on a New 
York bank payable to your order. Then you should endorse the 
bank's check to the order of the party to whom you are remitting. 

Banks do not like to sell their checks on other banks to 
strangers. Some expert at raising checks may buy New York 
Exchange for ten dollars and raise it to ten thousand. Also he 
might buy the bank's check with the idea of obtaining the 
Cashier's signature for the purpose of forgery. 

The Method of issuing National Bank 
Notes 

Many people have the idea that a National Bank, having a 
capital of, say one hundred thousand dollars, can call on the 
United States Treasury Department for an equal amount of 
National Bank Notes, without expense to the bank; and thus 
have double the amount of its capital to lend at the start. 

The National Bank Act does say that each National Bank 
must issue currency equal to a certain per cent, of its capital ; and 



49 

further, that each National Bank can issue currency equal to the 
full amount of its capital. But the profit on taking out this cur- 
rency, or circulating notes, is so very small that many banks 
do not issue as much as the law allows. 

These circulating notes must be issued under certain expensive 
conditions. First, — the bank must purchase and deposit with the 
Treasurer of the United States an amount of registered United 
States Bonds, equal at their par value, to the amount of the 
circulating notes called for. Second, — dependent on the kind 
of bonds deposited, the bank must pay a tax on its circulating 
notes. Third, — the bank must stand the expense of plates for 
printing and the express charges for sending it the original 
issue of its notes. Also, when any of its worn out, or mutilated 
notes are sent to the Treasury Department, they are destroyed, 
and the bank then has to pay the expense of re-issue and the 
express charges for sending them to the bank that originally 
issued them. The signature of the President and Cashier of the 
bank must be affixed. 

Therefore National Banks, in calculating the possible profit on 
taking out circulating notes, have the following example to be 
considered in issuing every one hundred thousand dollars of their 
notes : 

Bonds purchased : United States Registered 
2°/o bonds to be paid at par in 1930. 

Price of bonds 104 $104,000.00 

Par value of bonds purchased 100,000.00 

Money worth 6fo. 

Income from bonds $2,000.00 

Income from circulating notes loaned at 6% — 6,000.00 

$8,000.00 
LESS DEDUCTIONS. 

Annual tax on circulating notes $500.00 

Sinking Fund to retire premium on 
bonds at maturity, amount to be 

charged off each year 181.00 

Expenses (plates, express charges, etc.) 75.00 756.00 

Net Income from Circulating Notes $7,244.00 

Net Income from loaning $104,000.00 (net cost 

of bonds purchased) at 6% 6,240.00 

Net profit on taking out $100,000.00 of cir- 
culating notes $1,004.00 



5° 

Hence the net percentage of profit on taking" out National 
Bank notes on this class of bonds,, is about one per cent, based 
on their present market price. 

The profit on taking out circulation on other United States 
bonds is even less. 

Suppose the market price of the 2% bonds purchased was 
higher, say 108, as it was several years ago, the profit would 
be even less. Also, if the bonds decline in market value below 
par, (as in case of war, for instance), the bank must stand that 
loss ; and purchase and deposit an additional amount of bonds, 
so as to make the market value of the bonds deposited equal 
to the amount of its outstanding circulating notes. 

In order to retire its circulating notes and obtain possession 
of its United States Bonds, deposited as security therefor, the 
bank must send the Treasury Department an amount of lawful 
money equal to the amount of the circulating notes it wishes to 
retire. It can then "withdraw a proportionate amount of the 
bonds held as security for its circulating notes." 

But the law says that not more than nine millions of National 
Bank Notes can be retired in any one month. Therefore, if the 
market price of United States bonds goes up to a point, where 
all profit on its circulation is wiped out, the bank may have to 
wait several months until previous requests for retiring circula- 
tion are out of the way. In the meantime United States bonds 
may have gone down in price. 

As has been stated, a National Bank can take out an amount 
of circulating notes, or National Bank currency, equal to the 
amount of its capital. But the profit on the operation is so small, 
(leaving out the chanees of actual loss), that many banks do not 
issue notes to the full amount allowed. The following figures 
relative to the total capital of all the National Banks, and the 
total circulation of these banks on the dates stated, conclusively 
prove this fact. (These figures are taken from the annual report 
of 1907 of the Comptroller of the Currency.) 

November 12, 1906. January 26, 1907. March 22, 1907. 

Capital Stock $847,514,653.00 $860,930,624.00 $873,669,666.00 

Circulating Notes _ 536,109,931.00 545,481,870.50 543,320,375.00 

May 20, 1907. August 22, 1907. 

Capital Stock $883,690,917.00 $896,451,314.00 

Circulating Notes 547,918,696.00 551,949,461.50 



5* 

It can be seen from these figures that the National Banks 
could have taken out over three hundred millions more of cir- 
culating notes than they actually issued during the time stated. 
And these figures are not exceptional. 

Banks, other than National, ''shall pay a tax of ten per 
centum on the amount of their own notes used for circulation and 
paid out by them." This tax is prohibitive and no State Banks 
issue circulating notes for this reason. 

The so-called "Special Privileges** of Banks 

In every political campaign, especially the National ones, the 
orators talk a great deal about the "special privileges" of banks. 
But they are never defined exactly. 

According to them, one privilege (?) the bank enjoys is the 
power to lend a certain per cent of its depositors' money. But 
if it could not do this, what reason would the bank have for 
existing. That is its principal real source of profit. 

Practically the only other privilege the National banks have, 
is the right to take out National Bank Notes, or currency. As 
has been shown in the remarks on "The Method of Issuing 
National Bank Notes," this privilege allows so little profit that 
the banks do not use it to the full extent of the law. 

On the other hand, consider a few of the many risks the bank 
is constantly taking. Every loan it makes is a risk. A few bad 
loans, made through dishonest or visionary representations of its 
customers, may blot out the bank's profits for a year or more. 
Every check or draft cashed is a risk. Every check, draft, or 
note it takes for collection is a risk. In fact, every transaction 
the bank undertakes is more than ordinarily hazardous. More- 
over the profits of the average city bank are not large. Consid- 
ering their responsibilities and the innumerable ways, by which 
they may involve the bank, the salaries paid the employes, from 
the President to the messengers, are small. Also remember there 
is no "water" in the stock of banks. The capital of every National 
Bank must be fully paid in, before it is allowed to open for busi- 
ness; and in most of the States, the banks, other than National, 
must have their entire capital paid up within a year from their 
beginning. The net profits of successful banks, located in cities 
with a population of one hundred thousand or over, average 
about six to ten per cent. The business man, when considering 



5* 

an investment in a mercantile or manufacturing enterprise, gen- 
erally counts on double that amount of dividends. 

If, as the politicians state, the banks enjoy so many "special 
privileges"; it is strange that the people of every section of the 
country do not rush in to organize and take stock in banks. 

The Guarantee of Bank Deposits 

In the National Campaign just ended, a great many reasons 
have been advanced for, and against, this project. 

On its face, it is very attractive to the people. In actual prac- 
tice it will not work out. 

Two ways have been proposed. One is for the Government 
to assess the banks to pay the depositors of any failed bank. The 
other is for the Government to pay the losses of any depositors 
from the general taxes levied on all the people. Both ideas are 
unsound and socialistic. 

It is just as reasonable to pass laws requiring the honest 
grocers to guarantee the weights of the dishonest, as to make 
the stockholders of an honest and careful bank guarantee the 
depositors of a dishonest or reckless one. If the banks should 
guarantee each other, why should not Life and Fire Insurance 
Companies, do likewise? And so on with all other lines of busi- 
ness. Could such laws be constitutional or sane? 

On the other hand, suppose the Government levies taxes on 
all the people to pay the losses of bank depositors. There are 
many grave objections to this. 

As has been explained in the quoted remarks of Mr. Horace 
White regarding the "Functions of a Bank," the deposits of a 
bank are not only the actual money deposited by its patrons, but 
also the proceeds of loans made by them and placed to their 
credit on the bank's books. You deposit a thousand dollars, and 
your account is credited. Another time you borrow a thousand 
dollars from the bank, and your account is credited. In each case 
the bank's deposits are increased because the credits to your 
account are increased. Now in checking against these credits 
to your account, you can not say whether you are drawing out 
the cash you deposited or the money you borrowed. Both amounts 
were put to your credit in one account. The bank can not keep 
two accounts for you ; and if it could, to which account must it 
charge any certain checks you draw? Therefore, if the Govern- 



53 

ment guarantees the deposits, it is also practically guaranteeing 
the loans and discounts in some instances. 

For example, say the bank has a reckless, or visionary, or 
dishonest man in charge. Brown gives his ninety day note, 
secured in some way, to the bank for $10,000.00. His account 
is at once credited with the proceeds, $9,850.00. Brown then 
gives his check to Jones, who keeps his account at the same 
bank, for $9,850.00, and Jones deposits that check to his credit. 
About this time the bank fails. It is found that the security 
on Brown's note is worthless. The banker should have known 
that; so, in taking the loan, he was probably reckless, visionary, 
or dishonest. But that does not concern Jones. His deposits 
are guaranteed by the Government. Moreover, Brown and Jones 
and the banker may have been confederates. Could any one prove 
that the banker was dishonest in taking Brown's note, or was 
it only bad judgment? Any number of dishonest schemes could 
be devised and successfully carried out with "guaranteed 
deposits." 

The guarantee, the depositors of National Banks now have, 
is the amount of the bank's Capital and Surplus ; the double lia- 
bility of the stockholders ; the strict supervision of the United 
States Government; and last, but by no means least, the char- 
acter of the bank's officers. But if deposits were guaranteed, 
all these could be disregarded utterly. You would then be 
attracted to a bank almost entirely by the liberality it showed in 
its loan department. The most reckless banker would have the 
most customers. That would be only a logical and natural result. 

Dishonorable men can always command capital to put through 
a "sure thing." Suppose some sharpers start a bank. With 
"Deposits Guaranteed by the Government" hung out in front of 
the bank, and temptingly high rates of interest offered on deposits, 
the people will not discriminate. You can not have a bank exam- 
iner stationed in every bank, day and night. As soon as the 
"guaranteed deposits" exceed the capital by a sufficiently large 
amount, the promoters of this "fly by night" institution decamp 
with the cash. And the Government, or the honest banks, pay 
the loss. // deposits had not been guaranteed, there would have 
been no deposits. 

Thus dishonest and reckless men would be attracted to the 
banking business all over the country. 



54 

The only reasonable way for the Government to guarantee 
bank deposits is for it to go into the banking business and have 
entire charge of the banks in every way. In short, "Government 
Ownership" of banks. That is socialism pure and simple. Con- 
sider what the party in power could do, if it controlled all the 
money and the banking facilities of the country. 

"Guaranteed Bank Deposits" sounds most attractive. So does 
guaranteed life or fire insurance policies, guaranteed railroad 
stocks and bonds, etc. We would all like to be guaranteed against 
loss of our money in every instance. 

As has been stated, the average annual loss to depositors in 
National Banks, since their beginning, some forty-four years 
ago, has been only thirty-seven one thousandths part of one 
per cent. Let the supervision of the banks by the National and 
State governments, be most strict and impartial; and there will 
be no necessity for any guarantee of deposits. 



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